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S. Arabia Could face Budget Deficit in 2015

The IMF warned the Saudi kingdom to rein in public spending, which has risen 52 percent annually since 2010 and reached SAR994.7 billion ($265.2b) in 2013.

Saudi Arabia’s state finances could fall into the red next year and the country could start running down its huge foreign reserves if it does not rein in the growth of government spending, the International Monetary Fund said, according to Gulf Business report.

The IMF has been urging the world’s top oil exporter to moderate its rapid spending growth for years – warnings which have been publicly dismissed by Saudi officials as alarmist.

But an IMF report released this week, following annual consultations with the government, painted the most ominous picture yet of looming financial pressures on the kingdom.

The government has launched huge and costly infrastructure projects, while falling oil prices threaten to shrink state revenues. Meanwhile, Saudi Arabia is spending heavily on aid to other Arab countries in order to maintain geopolitical stability in the region.

The wealthy kingdom could easily handle any one of those pressures, but the IMF report suggested that even Saudi Arabia’s oil wealth might not be enough to cope with all of them at once.

The government may post a budget deficit of 1.4 percent of gross domestic product in 2015 instead of the four percent surplus which the IMF forecast as recently as April, the report said.

Fiscal Shortfall

Previously, the IMF had predicted Saudi Arabia would fall into deficit only in 2018. Its latest report said the fiscal shortfall was likely to widen to as much as 7.4 percent of GDP in 2019. Riyadh last posted a budget deficit in 2009, when oil prices briefly plunged because of the global financial crisis.

“The fiscal consolidation that (IMF) staff had expected to take place in 2013 did not materialize, and it is important that the government now moves ahead and implements fiscal adjustment,” the IMF said.

“An adjustment that reduces the non-oil fiscal deficit by about three percent of non-oil GDP a year during 2014-19 relative to the 2013 budget outcome would ensure that government deposits remain sufficient to manage a large drop in oil prices.”

Spending

State spending has soared over the last few years as the government has spent more on welfare to ensure social peace in the wake of the Arab Spring uprisings. Since 2010, annual spending has risen 52 percent to SAR994.7 billion in 2013.

The government is now embarking on infrastructure projects that will boost spending further. In 2014-2018, capital expenditure is projected to rise above 16 percent of GDP from 11 percent in 2012 because of railway construction and other projects in big cities, while housing loan disbursements are likely to reach up to SAR25 billion a year, the IMF estimated.

This could erode the reserves which the government has built up at the central bank, the Saudi Arabian Monetary Agency (SAMA), during the past several years of high oil prices, the report warned.

“Government deposits at SAMA are projected to drop by about 55 percent between 2013 and 2019 and in 2019 would be sufficient to cover six and a half months of spending,” the IMF said. Its report implied that the deposits would sink by roughly SAR896.5 billion by 2019 from SAR1.6 trillion in 2013.

SAMA’s net foreign assets are projected to rise to $768.5 billion in 2014 from $716.7 billion last year, the IMF said.

The report predicted the country would sell its crude oil for $101.6 per barrel in 2015 but only $91.8 in 2019.

Meanwhile, Saudi Arabia’s foreign aid commitments have become a significant cost. It pledged $22.7 billion in financial assistance between January 2011 and April 2014 and disbursed $10.9 billion of that amount, mostly to Egypt, the report showed. There have been other pledges since then; in August, King Abdullah granted the Lebanese army $1 billion to help it battle militants.

The IMF expects a budget surplus of 2.5 percent of GDP in 2014 but some economists think the aid commitments could push the government into the red as soon as this year.